Glen McLeod, director of Edge Mortgages, explains why we should all be watching how banks are stress testing home loan borrowers.
Glen McLeod is director of Edge Mortgages. He will answer readers’ questions about home loans, whether you’re a first-timer just getting into the market or someone who already has a loan and is wondering about the best way to manage it. If you have a query, email email@example.com.
Q: Would you be wary of borrowing with a 10% deposit, if house prices are going to fall?
A: When it comes to the lending money with less than 20% deposit the lenders always take extra caution before granting an approval.
The lender wants to know the risk just as much as you do. They want to ensure the deal provides them adequate security cover in case of market falls. They want to be assured that you have the ability to pay the loan.
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The last thing they want to do is mortgagee sale of the property. Effectively, the application process they go through for lending over 80% has a more stringent set of criteria. This is to protect them against loss.
To borrow using 10% deposit you will be looking at an owner-occupied property. In theory that means that you are looking at staying in that property for a long time.
We have learnt over many years of statistics that property prices over a long period of time increase. Throughout the last three or four decades, we have seen property value corrections at various times after the market has steamed ahead out of control.
I think it’s fair to say that what we’ve seen that over the last couple of years – 30% increases in value – are not sustainable, and take the ability for people to affordably purchase in a market away from them. So what we seem to be going through right now is a market correction. How much the market will fall no one really knows. Many commentators will bandy around figures like 5% to 30% reductions.
We do know that once we start to come out of the slump, prices are more than likely to rise again albeit at a slower rate.
Choosing the right property for you to purchase at this time requires you to do your homework. Is the price that you’re paying for the property the fair market value? At the end of the day if you’re satisfied with that price, then the price you’re paying is a good one. The lender will ask for a valuation to be completed in most cases where the deposit is under 20% of the value of the property. If the registered valuation concurs with your purchase price, then it’s fair to say that you’re on the right track.
Remember when you pay the price for a property you’re putting a line in the sand. You may see a further decrease in the value over the next few months until our economic situation turns around. Over the next few years you are likely to see the value of the property surpass your purchase price.
So I guess the real question here would be is it okay to borrow at 90% at the present time if the opportunity arises.
One thing we know is that once you’ve actually purchased a property with a deposit and have your loan set up, provided you continue to pay the loan based on the contractual terms of your mortgage, the lender will continue with their contractual obligations. The only time issues seem to arise in this area is if you are unable to meet your obligations and stop paying your mortgage. At that time the lender will then reassess your total position.
Typically speaking, when you’re borrowing above 80% loan to value ratio then the interest rate you will pay will have a margin on top or you will have a low-equity premium to pay. If you are buying through the Kāinga Ora fist home loan product the interest rates will be in line with the market rates and you will pay a 1% fee to Kāinga Ora. This is likely to be capitalised into your loan.
With all the rules that are now in place regarding affordability, like the responsible lending rules, if you are granted an approval you are in a position to know that you can make the payments with confidence.
So by continuing to pay your mortgage and ride through the tumultuous times should see you have a property that’s worth more than you purchased it for. As Rachel Hunter says in the Pantene advertisements, “it may not happen overnight, but it will happen”.
House price falls gathered pace in July, according to CoreLogic data, with Christchurch also going negative.
People who purchased before the global financial crisis saw their houses drop in value for two or three years but then almost double in value over the next five to seven years.
Buying a house and taking on a mortgage causes anxiety and most people. That’s OK, it’s just the body and mind telling you that you need to get more answers before you go ahead and make your decision.
Talk to your experts. Discuss the situation with your adviser, lawyer, accountant and any property expert that you may know.
Knowledge is power in these situations. Because once you’ve made the decision what you really want to do is put the paperwork in the bottom drawer and enjoy the purchase and your new home.